Omega Healthcare Investors Inc (OHI) 2015 Q2 法說會逐字稿

Good day, and welcome to the Omega Healthcare second-quarter earnings call and webcast for 2015.

(Operator Instructions)

I would now like to turn the conference over to Ms. Michelle Reiber. Please go ahead.

Thank you, and good morning. With me today are Omega's CEO, Taylor Pickett; CFO, Bob Stephenson; COO, Dan Booth; and our Chief Corporate Development Officer, Steven Insoft.

Comments made during this conference call that are not historical facts may be forward-looking statements such as statements regarding our financial projections, dividend policy, portfolio restructuring, rent payments, financial condition or prospects of our operators, contemplated acquisitions, and our business and portfolio outlook generally. These forward-looking statements involve risks and uncertainties which may cause actual results to differ materially. Please see our press releases and our filings with the Security and Exchanges Commission, including, without limitation, our most recent report on Form 10-K, which identifies specific factors that may cause actual results or events to differ materially from those described in forward-looking statements.

During the call today, we will refer to some non-GAAP financial measures such as FFO, adjusted FFO, FAD and EBITDA. Reconciliations of these non-GAAP measures to the most comparable measure under Generally Accepted Accounting Principles, as well as an explanation of the usefulness of the non-GAAP measures, are available under the financial information section of our website at www.OmegaHealthcare.com, and in the case of FFO and adjusted FFO, in our press release today. I will now turn the call over to Taylor.

Thanks, Michelle. Good morning, and thank you for joining Omega's second-quarter 2015 earnings conference call. Adjusted FFO for the first quarter is $0.77 per share. Adjusted funds available for distribution, FAD for the quarter, is $0.70 per share. We increased our quarterly common dividend rate to $0.55 per share, which is a 2% increase from the last quarter, and an 8% increase from the second quarter 2014. We've now increased the dividend 12 consecutive quarters.

Our second-quarter actual results are ahead of our adjusted FFO guidance of $0.74 to $0.75 per share, and our FAD guidance of $0.68 to $0.69 per share. We have increased the lower end of our third and fourth quarter adjusted FFO guidance by $0.01, and have maintained our third and fourth-quarter FAD guide. The integration of Aviv is substantially complete, and we've already begun to cross-market both offices' capabilities amongst all of our combined operators in an effort to maximize our expertise and resources. As we have discussed previously, the Aviv merger further diversified our operator base and geography. At the end of the quarter, no operator exceeded 7% of total investments, and no state exceeded 10% of total investments.

On the personnel front, last week, we announced that Lee Crabill, our Senior Vice President of Operations, retired. Lee was a valuable member of our team for 14 years. His responsibilities have been divided among members of our Chicago and Hunt Valley offices. Lee has agreed to stay on as a consultant through the end of the year, to ensure a smooth transition. Bob will now review our second-quarter financial results.

Thank you, Taylor, and good morning. Our reportable FFO on a diluted basis was $100.7 million, or $0.52 per share for quarter, as compared to $79.7 million or $0.63 per share for the second quarter of 2014. Our adjusted FFO was $149.7 million, or $0.77 per share for the quarter, and excludes the impact of $47.1 million of expenses associated with acquisitions, the $2.9 million of non-cash and stock-based compensation expense, and a $1 million gain related to interest rate financing expense.

Operating revenue for the quarter was $197.7 million, versus $128.8 million for the second quarter of 2014. The increase was primarily a result of incremental revenue from a combination of the Aviv acquisition and other new investments completed since the second quarter of 2014, capital improvements made to our facilities and lease amendments made during that same time period. The $197.7 million of revenue for the quarter includes approximately $15 million of non-cash revenue.

Operating expense for the second quarter of 2015, when excluding acquisition-related costs, stock-based compensation expense, impairments, and provisions for uncollectible accounts receivable was $31.3 million greater than our second quarter of 2014, due to the Aviv merger and other acquisitions. Our G&A was $7.4 million for the quarter, and we project our G&A expense to be between $7 and $7.5 million per quarter, with a growth over 2014 related to the Aviv merger, and completion of other new investments.

In addition, we expect our non-cash stock-based compensation expense to be approximately $2.9 million per quarter. Interest expense for the quarter, when excluding non-cash deferred financing cost and refinancing cost was $38.2 million, versus $29.4 million for the same period in 2014. The $8.8 million increase in interest expense resulted from higher debt balances associated with financings related to our 2014 investments and 2015 financings, that positioned Omega to refinance Aviv's debt on April 1.

Turning to the balance sheet for 2015, in April, we completed the Aviv acquisition via merger. The transaction was a stock for stock swap with each share of Aviv being exchanged for 0.9 shares of Omega. As a result, Omega exchanged 48.6 million Aviv common shares for 43.7 million Omega common shares, and also exchanged 10.2 Aviv partnership units for 9.2 million Omega partnership units. Also in April, Omega used credit facility borrowings to complete a $178 million investment in the UK which Dan will cover in more detail. As I mentioned, the Aviv acquisition was a stock for stock swap.

However, simultaneous with the acquisition, Omega repaid Aviv's outstanding credit facility and senior notes with cash generated from a combination of a March $700 million 4.5% senior unsecured note due 2027 issuance, and a February unwritten public offering of 10.925 million common shares of Omega stock that generated $439 million of proceeds. In addition, during the first six months of 2015, we redeemed our $200 million 7.5% senior notes due 2020, we repaid $156 million to retire 22 mortgage notes guaranteed by the Department of Housing and Urban Development, and under our dividend reinvestment and common stock purchase plan, we issued 813,000 shares of common stock, generating gross proceeds of $30 million.

For the three months ended June 30, 2015, our funded debt to adjusted pro forma annualized EBITDA was 4.5 times, and our adjusted cash fixed charge coverage ratio was 4.3 times. I'll now turn the call over to Dan.

Thanks, Bob, and good morning, everyone. As of the end of the second quarter of 2015, Omega had a core asset portfolio of 923 facilities, with approximately 92,000 operating beds distributed among 84 third-party operators located within 41 states and the United Kingdom. Trailing 12 month operator EBITDARM for the entire current portfolio, which now includes all of the former Aviv facilities, remained stable during the first quarter at 1.8 times as of March 31, 2015, versus 1.8 times for the Omega standalone portfolio as of December 31, 2014. Correspondingly, trailing 12-month operator EBITDAR coverage also remains stable at 1.4 times for our current portfolio as of March 31, versus 1.4 times the Omega standalone portfolio as of December 31, 2014.

Turning to new investments, in addition to the Aviv merger, which was consummated on April 1, Omega completed $178 million new investment in the United Kingdom during the quarter. This transaction involved the sale leaseback of 23 care homes in the East Anglia region of the UK. The facilities were leased back to Healthcare Homes, a new Omega tenant, pursuant to a 12-year master lease agreement, with an initial cash yield of 7%, and annual escalators of 2.5%. During the quarter, the Company also invested approximately $18 million under its capital renovation and construction programs.

Turning to subsequent events, in July of 2015, Omega closed on five additional investments totalling $184 million. Four of the five transactions totaled $72 million, involved 12 facilities in four states with annual cash yields ranging from 8% to 9.25%. Further details on these transactions can be found on our press release, and in our second-quarter 10-Q filing. The fifth transaction involved a $112 real estate acquisition for an assisted living development project in the Upper East Side of Manhattan. This project will be codeveloped with and leased to Maplewood Senior Living, currently Omega's third largest tenant and the operator of 11 existing assisting living facilities, one skilled nursing facility, and two ALFs currently under construction, and located in the states of Connecticut, Massachusetts, and Ohio. In a moment, I'll turn the call over to Steven Insoft, Omega's Chief Corporate Development Officer, to discuss Maplewood on the Upper East Side project in more detail.

Concluding with our pipeline discussion, both the Chicago and Hunt Valley acquisitions teams have been actively reviewing and underwriting a significant number of investment opportunities. At this point, we are comfortable reaffirming our acquisition target of $650 million of new investments for the year, with the opportunity of perhaps exceeding that target. As of today, Omega currently has approximately $770 million of cash and availability to fund new investments.

As mentioned, at this point, I would like to turn the call over to Steven to give an overview of Maplewood, and the aforementioned Manhattan assisted living development project. Steven?

Thanks, Dan. In our ongoing effort to leverage our new construction capabilities and our long-term relationship with Maplewood Senior Living, we're excited to announce that we have acquired a development site in New York City to complement our existing Maplewood pipeline. The site, costing $112 million, is an assemblage of properties located in Manhattan on Second Avenue between 93rd and 94th Streets. Our intent is to build a 214-unit, 201,000 square-foot, 20 story, ALF and memory facility, with a total project cost of $246 million inclusive of the land acquisition price.

We expect the project to open in early 2018. Maplewood has considered many sites in the New York City market, but this particular opportunity, striking the right balance of cost and neighborhood appropriateness for this use. Maplewood Senior Living, based in Westport, Connecticut, has facilities in Connecticut, Massachusetts, and Ohio, with their Connecticut facilities concentrated in the metro New York City suburbs of Fairfield County.

As such, the New York City market presents a strategic extension of Maplewood's footprint and the Manhattan market, in particular, allows Maplewood to fill a long-time market void of purpose-built assisted living and memory care facilities, with its best-in-class service and real estate offerings. While each of Maplewood's facilities are designed and programmed to accommodate the local market they're in, all of their facilities have an extremely high level of focus on design, decor, and service that the residents and their families in these communities have come to value. This market acceptance of their business plan has translated into average portfolio monthly realized rents in excess of $8,000 in their suburban New York City locations, and the memory care rates in these markets are in excess of $9,300 per month.

Based upon Maplewood's experience and our market research, we're comfortable that the Manhattan market will fully embrace Maplewood's level of design and service. Maplewood at Second Avenue is included in Maplewood's 15-year master lease. Omega will receive a 5% current yield on the $112 land investment during the permitting and construction period, and following the completion of construction in 2018, our year-one lease yield will be 7%, our year two lease yield will be 8%, and then we'll enjoy a 2.5% annual escalator thereafter.

All of Maplewood's facilities are owned by Omega and subject to one master lease. There are six stabilized facilities, including their one SNF, have EBITDAR coverage of 1.44 times. There are six Maplewood properties that are currently in fill-up and two more under construction, exclusive of the Second Avenue site. All of Maplewood's projects have met or exceeded projected fill-up and return expectations, and as such, we are very excited about the Second avenue opportunity. While we remain very much a SNF-focused REIT, Maplewood is an example of how our emerging senior housing strategy allows us to leverage our internal turnkey construction capabilities, when paired with best-in-class regional senior housing operators, with whom we are looking to work.

Thanks, Steve, and that concludes our prepared comments. We'll now open the call to questions.

(Operator Instructions)

Nick Yulico of UBS. Please go ahead.

Good morning, this is Trent Trujillo in for Nick. First question, was any of the FFO guidance increased due to more favorable accounting changes related to the Aviv merger?

No.

Not at all. Okay.

Yes.

And then just to follow up on the Maplewood deal, wanted to make sure I jotted this down correctly, the ultimate cost to construct the project is $261 million? And you expect rents to be -- is it anywhere between $8,000 and $9,300 a month?

No, so the way to think about the total project cost will be about $246 million, and that will include the land acquisition. The rental rates in Manhattan are going to be materially higher than they would be in Fairfield County to accommodate the higher real estate costs. While absolute rents have not been set yet, I would think it's reasonable to be in the range of 50% or better higher than the current run rates in Fairfield County.

Okay. Thank you very much, appreciate that.

The next question comes from Tayo Okusanya of Jefferies.

Congrats on the great quarter. I just wanted to talk a little bit about again your investment in the UK, and your recent increased focus on senior housing. As we just think about OHI as a company, and again, for the longest time, you've been known as it is classic, pure play domestic SNF guys. But as you start to do these bolt-on transactions, and you start to have a little bit of style drift, how do you lay that on top of what people historically have always bought into the stock for? Are you somewhat concerned you may be changing your stripes a little bit and alienating investors who have known you as, this is what these guys do and do so well?

From our perspective, Tayo, it still begins with the tenants. The relationship with Maplewood started a number of years ago. The UK was new for us, but we have talked about putting our toe in the water as it relates to assisted living facilities and private tags. But when we think about how we allocate capital, with 84 tenant relationships, 82 of them SNF-driven tenant relationships, and only two that are pure-play significant assistant living facility relationships, we're still going to dedicate the vast majority of our capital into those skilled nursing facility relationships. To the extent that there's available product, that's our number one priority.

That being said, we've identified a handful of tenants that fit the mold that we like, which is they need capital. They work exclusively with Omega, and we're able to grow with them in an asset type that we like. And we're getting rates that are favorable, in terms from a yield perspective. So it might be a little bit of style drift, but only style drift when you look at property type, but not how we run our business and how we think about tenant relationships as a growth mechanism going over the next decade.

That's helpful. And how big could you see someone like the UK getting for you? Is this really more specific to this one tenant and why you did it?

It was specific to the one tenant. We went over there, it was an opportunity. We really hit it off well with their operator over there. We do expect to grow with them. They are acquisitive. They are looking at new deals today, but I think we're really going to work off of their acquisitive nature to do new deals in the future.

Okay, great, thank you.

(Operator Instructions)

Chad Vanacore of Stifel.

So just looking at your results, it doesn't look like you issued anything in the ATM this quarter. How should we be thinking about your use of the ATM and how you feel about equity issuance at these levels?

We'll -- you're right, we didn't use the ATM this quarter. We'll look to use the ATM modestly, and if we see the stock move up a little bit, we'll use it a little more aggressively, and it's really going to be driven the pipeline, which as Dan mentioned, is pretty active. So to the extent we start to see deals, we'll principally issue equity through the ATM as we move forward.

All right, that's it for me, thanks.

(Operator Instructions)

This concludes the question-and-answer session. I would like to turn the conference back over to Taylor Pickett for any closing remarks.

Thank you, and thank you for joining the call this morning. Bob will be available for any follow-up questions you may have.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.